3PL costs increasing – what can you do?

It has always been an ongoing challenge to manage costs across the supply chain.  Outsourcing to a 3PL is a big ticket item, but the benefits to your business can optimise service and cost while you focus on driving your business, product development, growth, and expansion plans.  Ongoing management of these costs, however, hangs over every partnership, and 3PL contracts are no different.

In today’s cost challenging world, those of us who have outsourced to 3PLs are seeing charge increases that might feel like they are outside of our control.  It is unlikely that we can avoid all of them. We should certainly, however, focus on mitigating their impact on our business into the future.

We have heard some of our clients ask if they have picked the right partner, as their costs are rising significantly.  Others look to re-tender their business to drive cost efficiencies. A small number will reconsider their business model with a 3PL. 

If you have similar wrangling questions, then when searching for an answer, be sure to first remind yourself of the benefits that your 3PL partner brings to your business.  At the same time, let’s consider what is driving increased charges and explore some areas for you to consider. 

Some of the most challenging costs currently include;

Freight

Freight costs have come down over the last 12 months, and there are expectations of more freight decreases in 2023.  Reductions in container capacity pressures, falling airfreight costs, and reducing fuel charges are driving a downward trend in freight charges.  Brands should work with their 3PLs and transportation providers to ensure that any cost savings are passed on. 

While some costs may never fall back to pre-pandemic rates, you should ensure that the cost reductions and savings being experienced by your partners in this area, are shared so they can benefit your bottom line.

Energy costs

Energy cost increases have impacted all businesses and all supply chains, as well as consumers the world over.  While it may feel like there is little you can do regarding this significant cost, looking across your supply chain can help.  Are there areas within your organisation that can be more energy efficient?  Is your 3PL implementing energy efficiency measures? Can you work with them to encourage and enable some of these measures?  Similarly, can your supply base improve the energy content of their products or services?  Can you look at energy efficiency as a measurement or key indicator requirement in your new supplier introduction processes?

Wage increases

Wage increases such as the introduction this month in The Netherlands of 10.15% increase on minimum wage may impact on your business.  It is understandable that cost increases such as these will be passed on. Alongside other increases, however, it can be difficult for any business.  Rather than lament this cost increase, we can instead look deeper into our supply chain at areas where we can gain efficiencies to counter the cost impact.

Warehousing costs

Warehousing costs have been an ongoing challenge for some time. This has been driven by a mixture of reduced warehouse availability, growth in stockpiling over the last few years, near-shoring constraints, as well as energy, wages, as mentioned earlier. 

So where can I look for efficiencies and cost reductions? 

The main focus area for you should be where can you proactively drive efficiency gains. 

How can you increase your productivity or drive down your costs?  Is your 3PL driving efficiencies that your business can benefit from?

A number of areas to consider;

• Review your contracted scope. What is currently in scope with your 3PL, and which areas are most impacted by cost increases?  A scope review can often identify areas that are either no longer required to meet your business objectives or need realignment to ensure optimised cost and value. 

• Your internal operations may be driving additional and sometimes unnecessary expenditure. Are there changes you can make that would mitigate against some of these cost increases?  Are there capacity constraints that, if resolved, could improve your financial position?  Are there internal inefficiencies that are driving suboptimal business processes and controls?  Have you completed a value stream mapping exercise and removed your non-value add activities? 

Removing waste within your own operation can result in improvements in efficiencies, cost, and customer experience, not to mention the potential for increased job satisfaction for your hardworking team and your supply chain partners.

• Are you holding too much inventory, or not the right inventory for your business? Tying up significant capital up in inventory can reduce your ability to respond to fluctuations in cost and cash flow.  Ensuring you are using the right planning rules and driving demand driven planning methodologies to right size your inventory holdings is key to managing this significant cost for your business.

• Storage costs are a substantial overhead for most organisations, and one that should be closely monitored. It is, however, often disregarded as a necessary evil. Storing the right inventory will help you in managing your storage costs, but product lifecycle management is also hugely important.  Ensuring you clear old product to allow space for your new product launches, as well as closely planning your events and peak season volumes, will help you to ensure that you only pay for the storage that your business really needs.

There are endless possibilities where you can work with your 3PL partner to drive optimisation efficiencies and reductions in charges. Possibilities include improved space utilisation, optimising picking processes, demand planning to drive enhanced inventory holding, and so many more.

Are you experiencing similar challenges? 

Are you unsure if your costs are reasonable in the market? 

We would love to hear from you.